It is only logical to find a new investor having difficulty in striking shares and mutual funds difference.
These days there are so many investment options available that people get confused.
Shares and mutual funds difference is a common point of confusion for majority.
If one wants to take full advantage of falling or appreciating market, then direct stocks purchase will give better returns.
But identifying shares which will go up and which will go down is not a job of beginners.
One shall not invest in shares if they do not have at least basic know-how of how stocks work.
In contrast, mutual funds are managed by experts and responsibility of profit is on the fund manager.
Even if one does not know anything about stocks, but a good mutual fund company will give him/her good returns.
In case of direct stock-purchase, individual investor are responsible for their own profits.
This does not mean that mutual fund results are guaranteed, but their results are at least more certain than stocks.
Like passive investing?
If you are a passive investor then mutual funds are a better choices.
Shares investment is like putting-down self in rough waters with expectation to cross the other side.
The shares and mutual funds difference becomes major if the investor is not trained in stock investment.
An expert like Warren Buffett who knows virtually everything about stocks would likes to invest in direct shares.
But for person like you and me whose knowledge is limited in stocks, for us mutual funds are better.
Are you a beginner?
For me mutual funds should be the first step for any beginners.
In mutual fund investment one need not worry about portfolio diversification because mutual funds are themselves very well diversified.
In a mutual fund portfolio different types of shares completes its composition.
For example, one of the oldest and best performing mutual fund is HDFC’s Top 200 growth fund.
The composition of portfolio of this fund few times back looked like this:
|6||Tata Motors (D)||30,137,761.00||3.99|
|8||Bank of Baroda||4,395,400.00||2.72|
|29||LIC Housing Fin||4,918,226.00||1.06|
|34||Rural Elect Cor||5,010,603.00||0.94|
|40||Dr Reddys Labs||535,575.00||0.79|
|45||P and G||319,079.00||0.64|
|54||Mah and Mah||625,305.00||0.48|
|60||Power Grid Corp||3,521,605.00||0.34|
|66||Bank of India||800,000.00||0.18|
Problem of a common man…
Top 3 stocks in portfolio of this HDFC Top 200 fund is SBI, ICICI Bank and ITC.
All in all there are about 75 stocks in its portfolio.
Firstly, for an average person it is not easy to buy so many stocks for purpose of diversification.
Secondly, it is most important to time the purchase of stocks.
A common man does not have sufficient know how to time the stock purchase correctly.
In HDFC Top 200 Fund portfolio you will see that stock of State Bank of India comprises 8% of total composition.
But all of this 8% stocks has not been bought at one time.
Over a period of several years, HDFC Top 200 has accumulated these stocks.
Thirdly, you can note that all stocks listed in the portfolio of this fund are fundamentally strongest stocks.
You know how to check valuations?
But being only fundamentally strong does not qualify them to be included in a top funds portfolio.
Individual stocks must also reflect correct valuations.
For a common man it is not easy to learn stock valuation.
Mutual fund managers are specially trained to value stocks and they also have a strong database and tools to do this analysis.
A common man lacks all of these skill and tools.
So to conclude, for a investors who knows nothing about stock market, shares and mutual funds difference is paramount.
This type of person shall always opt for mutual funds.
Worried about diversification?
Direct stocks does not gives the possibility of diversification and mutual funds are very well diversified.
Here the shares and mutual funds difference is very clear.
But this benefit also becomes a disadvantage for mutual fund.
Suppose SBI stocks has performed excellently (appreciation by 30%) in last 3 months.
But SBI is only 8% of total portfolio size, hence positive effect of SBI’s appreciation will be felt negligibly in portfolio.
If an individual who owned SBI stocks can quickly book profits when they see SBI prices appreciating so much.
But this is not possible in case of mutual funds as price gets averaged.
On positive side, if SBI stock perform badly, it bad effects will be not so severe as felt by investor who is holding SBI stocks.
Shares and mutual funds difference are not big, and this is the reason why mutual funds were developed which reduces all risks of investing in direct stocks.
Mutual funds has advantage of giving comparatively steadier returns compares to stocks.
If one wants to invest in direct stocks then they will be exposed to extreme volatility.
In mutual funds such high volatility is not present.
Cost plays a major role in establishing shares and mutual funds difference.
The advantage that one enjoys in mutual fund investment does not come cheap.
Investors are charged fees (entry/exit fees).
What does this fee means?
If you have Rs 5000 available for investment, then part of Rs 5000 will be lost as fees.
In shares investment a higher proportion of your money will be used to buy shares.
In direct shares small quantity of money is lost in paying brokerage, taxes and duties etc.
The cost of owning mutual funds is much higher that cost of owning shares.
There is a way to reduce high fees of mutual funds. Select index funds.
Returns also plays a major role in establishing shares and mutual funds difference.
Shares investment is for those investors who has higher risk appetite.
If you can digest short term stock market fluctuations then you can try your hands in stocks.
Mutual funds or index funds are comparatively stable, but will promise only average returns.
If we can value the stocks correctly, returns from stocks can be much higher than mutual funds.
When one buy’s individual stocks, money can be made in form of dividend and also capital appreciation.
If we can value our stocks well then maximizing dividend income and capital appreciation is easy.
But without basic knowledge of stock valuation, it is not easy to buy a profitable long term share.
This type of skill development needs time and interest.
For investors who does not has both (time and interest) should better go with mutual fund investment.
Still confused to establish shares and mutual funds difference even after reading this article?
I will suggest you to do the following:
- Buy a mutual fund unit and
- One share.
Track the variation of price for both.
Perform this job for at least a month and then read this article again.
I am sure you will start realising more the shares and mutual funds difference.
Ask yourself two simple questions:
- Do you know to read companies balance sheets/Profit and Loss accounts &
- Do you track track economic and market movements on regular basis?
If your answer is yes, try shares investment.
But if your answer if no, it is a sign that mutual fund can be your best friend.
In case you want to enjoy the benefits of shares and reliability of mutual funds, do this:
Try Exchange Traded Funds (ETF = Stocks + Mutual Funds).